While the SECURE Act has garnered most of the attention recently, including from us in some of our most recent blogs, it was not the only act that passed last year with tax ramifications. The SECURE Act was actually part of a broader act called the Further Consolidated Appropriations Act, 2020. This Act prevented a government shutdown, laid out how the government will appropriate funds across various departments and provided some tax updates outside of the SECURE act. In this blog, we will talk about some of those updates.
Kiddie tax is an income tax assessed on net unearned income of a child under age 18 or at least age 19 and under age 24, a full-time student, and does not provide more than one-half of his or her own support with earned income. Prior to the year 2018, the child's net unearned income was taxed at the greater of the child's or parent's income tax rate. In 2018, the rule was changed so that the child's net unearned income was taxed at the rates applicable to trusts and estate. Trusts and estates have compressed tax brackets so they reach the top tax brackets with far less income than individuals. For example, in 2019 the top tax bracket of 37% was reached for Individuals with income of $510,300, Married Filing Joint with an income of $612,350, but for Trusts just $12,750. The new rules revert back to the old tax rates. So, in 2020 and after, the kiddie tax is assessed at the greater of the child's or parent's tax rate.
Medical Expense Deduction
Taxpayers are allowed to deduct the eligible medical expense as an itemized deduction on Schedule A. However, the amount of the deduction is limited to the extent the qualified expense exceeds a certain amount. That amount is a percentage of Adjusted Gross Income (AGI), often referred to as an AGI threshold. The AGI threshold has varied a bit in the past, but in the recent past, it was generally 10%. So, if a taxpayer had AGI of $100,000 the 10% threshold would be $10,000. If a taxpayer had $15,000 of qualified medical expenses, his or her deduction would be $5,000. Under the old rules, the threshold was reduced to 7.5% for the years 2017 and 2018, and then it would revert back to 10%. The Consolidated Appropriations Act extended the 7.5% threshold for all taxpayers through the years 2019 and 2020.
Tuition and Fees Deduction
This one is a little bit messy. For the year 2017 and prior, taxpayers were allowed to deduct eligible tuition and fees as an above-the-line deduction (also referred to as an adjustment to income). Above-the-line deductions are not itemized deductions. They are allowed whether you itemize your deduction or not and are used to determine your Adjusted Gross Income (AGI). Adjustments to income can potentially provide multiple tax benefits since several deductions and credits are based on your AGI. As your AGI increases, you might be phased-out of some of these benefits. Therefore, lowering your AGI might allow you to qualify for them. Under the old rules, the Tuition and Fees deduction was phased out in 2018. Under the new rules, the act extends the deduction beginning in 2018 - 2020. For tax years 2019 and 2020, this is fairly straightforward. If you are eligible, you can simply take the above-the-line deduction going forward. However, what about 2018? When you originally filed your tax return, you could not claim this benefit as it no longer existed. But what if you are eligible now? Presumably, you will need to file an amended tax return. If you think you might be eligible, it's worth looking into. Not only will you benefit directly from the deduction, but as a result of a lower AGI, there may be additional benefits, too.
Mortgage Insurance Premiums
This one is similar to the Tuition and Fees deduction in that it expired after the year 2017, but has been extended from 2018 - 2020. Mortgage insurance premiums arise when you cannot put enough money down towards a down payment on a home. As a result, the lender requires insurance, the premiums for which are included in your monthly payment for a period of time. Premiums paid for qualified mortgage insurance in connection with the acquisition of a qualified residence are deductible as an itemized deduction. The Act extended this deduction from 2018 - 2020.
This concludes our third and final blog on tax updates passed in December 2019. While not all-encompassing, we did want to touch on some of the key provisions we are monitoring as we believe they will impact our clients. Please reach out to your team if you have any questions. We strive to be a trusted resource.
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